business taxes

Forms 1099 due!

In 2015, Congress decided to raise the penalties for late filing of forms 1099. The forms are generally due to be sent to the taxpayer by January 31st though some forms have other due dates. If filed electronically, the forms 1099 are due to IRS by March 31st. Paper filings, if allowed, are generally due by the end of February. Generally, if you have to file a lot of forms then you must file electronically.

When 1099

Before 2016

After 2015

sent

Normal

Small business

Normal

Small business

Per form

Limit

Per form

Limit

Per form

Limit

Per form

Limit

30 days or less late

$30

$250,000

$30

$75,000

$50

$500,000

$50

$175000

Before Aug. 2

$60

$500,000

$60

$200,000

$100

$1,500,000

$100

$500,000

After Aug. 1

$100

$1,500,000

$100

$500,000

$250

$3,000,000

$250

$1,000,000

Intentional Failure *

$250

No limit

$250

No limit

$500

No limit

$500

No limit

* Some forms have higher penalties if failure to file is intentional.

Penalties

The per form penalties apply to the form sent to the recipient and to the form due to IRS. So failing to send one form 1099 to the recipient and a duplicate to IRS before August 2 results in a total penalty of $500. Intentionally not filing one form with IRS and not sending a copy to the recipient is $1,000. As an example, XYZ company decides to not file any of the 10 forms 1099-MISC it should file. The penalty for not sending the forms to the recipients is 10 times $500 plus for not sending to IRS is 10 times $500, total penalty is $10,000.

Mighty expensive penalty for not filing out 10 relatively simple forms in a timely manner.

Exceptions

IRS is allowed to waive the penalties for reasonable cause. I just did not feel like it is not a reasonable cause. I did not know is pretty weak as all the major income tax forms for businesses now ask if you had to file a Form 1099 and then ask if you did.

What to do now

Paper filing is out since they are already late. Big businesses should already have in-house filing software or have contracted with a third-party for the service. Smaller businesses, landlords, and others required to file should use one of the online services before the deadline. Sure you may still owe the late fee for sending the recipient copy late but at least you can avoid the penalty for late filing with IRS. The online services typically send a copy to the recipient so that makes the $5 or so cost more acceptable – nor form to buy, no envelope to buy, and no extra cost for postage.

The NC Legislature, without much warning or lead time, changed the W-2 due date for NC employers. The old W-2 due date was the end of February. Now employers must send the the employer copy to the NC Department of Revenue by January 31, 2016. This W-2 due date change is also tied into a new mandatory electronic filing of W-2s effective for 2015 forms.

NC now requires Electronic Filing

The Legislature, as is true of most elected bodies, lacks many people with practical real world experience. On September 23, 2015, the Legislature passed H.B. 117 (PDF) requiring the new due date. But that was not enough for our Legislature, they decided to also require that all W-2s for 2015 be filed electronically. The only exceptions were for those employers requesting a hardship extension. Really? A little less than 3 1/2 months to get an entire new system setup.

For large employers and those using large payroll processing firms, the electronic requirement is no big deal. They had already invested in software for electronically filing W-2s. Their adjustment is to the new due date only. Smaller employers did not often have the capability to electronically file W-2s with NC. In addition, many of the payroll software vendors catering to small businesses did not have this capability. Even last year I saw handwritten W-2s from some small employers. The Legislature’s solution was to require the NC Department of Revenue to provide an online filing process.

Just this Monday (January 25th) , the NC Department of Revenue finished their programming to allow a simple method for electronically filing W-2s. Fortunately, the Department exercised its authority to grant hardship waivers without making employers apply. You can see their notice here. Basically, small employers can still file paper W-2s for 2015. Find more information on NC electronic filing here.

2015 W-2 form

NC W-2 Due Date change

NC employers had until the end of February 2015 to file W-2s with NC. This would allow employers to provide the W-2s to their employees by the end of January. Then if an employee had needed a correction, the employer had time. For example, if the Social Security Number, the employee’s name or address were wrong things could be fixed before the forms went to the government. No such option now.

Reason for the change

The stated reason is to help prevent identity theft. If NC is able to match the electronically filed W-2s to the individual returns before issuing a refund this should help a lot with identity theft. Considering the short time the Legislature gave to the Department of Revenue, I expect there will be problems this year.

Future Federal W-2 due date change

In December, Congress changed the due dates for 2016 W-2 forms due in early 2017. Congress also made the change to combat identity theft. At least Congress is giving employers time to adjust. The employer will have to file 2016 and future W-2s by the end of the following January. In years past employers who electronically transmitted forms W-2s received an extra month to file them with the government. Instead of the general end of February W-2 due date, electronic filers had until the end of March. No more!

Conclusion

Employers need to adjust their payroll processes to comply with the new due dates. Late filers will owe penalties. NC charges $50 per late W-2. IRS charges up to $100 per W-2 for 2015 W-2s and up to $260 for 2016 W-2s. Penalties are just money down the drain. Taxpayers cannot even deduct the penalty to reduce their income taxes.

On November 25, 2015 IRS provided small businesses and landlords with repair and capitalization relief. Please see Notice 2015-82 (PDF). The 2013 regulations provided guidance on what is a repair and what had to be capitalized. Bullet point four of this post mentions the 2013 changes. The regulations allowed businesses to treat amounts up to $500 as supplies. Previously, taxpayers would have had to justify deducting new property costing under $500. The new notice changes the amount from $500 to $2,500.

Looks like this car requires more than $500 in work!

Some background

Tangible property is just what it sounds like. It is property you can touch. Intangible property – such as a patent – cannot be touched. The copyright document can be touched but not the actual idea. For a long time, taxpayers and IRS have argued about whether or not a piece of tangible property is a repair or subject to capitalization. The distinction matters because businesses can immediately deduct repair and maintenance costs, with some exceptions. On the other hand, something that has to be capitalized is typically depreciated over anywhere from a few years to 40 years.

Depreciation is a method of claiming part of the cost of the capitalized asset each year for several years.

Repair = 100% deducted in year one (there are some exceptions which are beyond the scope of this post)

Capitalized = deduct as little as 2.5% of the cost each year for 40 years, sometimes even less per year.

Qualifying taxpayers

Taxpayers that have an applicable financial statement got a $5,000 safe harbor in the 2013 regulations. Taxpayers without an applicable financial statement (AFS) only received the $500 safe harbor. An AFS is one that is audited or required to be filed with a regulatory agency. If the only reason for audited AFS was to get the $5,000 safe harbor then the taxpayer was still stuck with the $500 safe harbor.

An example

XYZ Company built a $2,500 storage shed. Prior to the 2013 regulations, IRS would have wanted the taxpayer to deduct an average of $65 a year for the next 39 years. Assume XYZ Company has an AFS. If the shed was constructed in 2014 or after, then XYZ could claim the entire $2,500 as a supply deduction in the year built.

Assume ABC Company does not have an applicable financial statement and it builds the $2,500 shed in 2014. Under the 2013 regulations, ABC was stuck with claiming an average of $65 a year for 39 years. Notice 2015-82 changes this for 2016 (and for many also for 2015). If ABC builds a new shed in 2016 for $2,500, it can claim a supply deduction in 2016 of $2,500. A much better deduction than $65 a year for 39 years.

Repair and capitalization relief for 2015?

The notice states it “is effective for costs incurred during taxable years beginning on or after January 1, 2016.” This seems to say no businesses qualify for the $2,500 safe harbor under the notice until 2016. However, the notice goes on to say

AUDIT PROTECTION

For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an [applicable financial statement] can utilize the de minimis safe harbor … for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements ….

IRS is saying that if a taxpayer uses the $2,500 safe harbor in 2015, then IRS will not deny the supply deduction as long as it is less than or equal to $2,500. The taxpayer still has to meet all the other requirements that existed when the amount was $500.

How is this for some repair and capitalization relief? Audit protection, nice.

What is different in this report?

Many state business tax rankings use only income tax rates. The COST report uses the actual total of taxes paid as a percent of the total state business taxes paid. What does this mean? The report includes not only business income taxes but also individual income taxes paid on business income, sales tax on business expenditures, business property taxes, licenses, unemployment taxes, excise taxes, severance taxes (on minerals, oil, etc.), and other business taxes.

Why does this matter?

Does a business really care what kind of tax they pay? Is it more important to pay little or no income tax at the cost of very high sales tax? Of course not. Total tax is what comes out of the business’ pocket not just one type of tax. For example, Nevada has no state individual or business income tax. So NV’s income tax rate is considered zero which would rank it at the top of any state tax ranking based solely upon rates. North Carolina has individual and corporate income taxes. However, NV businesses pay 53% of all state and local taxes while NC businesses pay only 38.8% of all state and local taxes. Further, the Total Effective Business Tax Rate (TEBTR) in NV is 5.9% while in NC it is 4.3%.

All other things being equal, even though NC has an income tax and NV does not, on average a business should prefer NC business taxes to NV business taxes.

Is COST the best state business taxes ranking?

Of course not. Every business is different and every state’s tax laws are different. Property taxes and general sales and use tax on inputs are the two largest components of state and local business taxes. However, many service business (like CPAs) have very little in property so their property taxes are low. For these businesses, income and payroll taxes become a much larger concern.

On the other hand, the rankings solely based upon income tax rates are not the best either.

What do you think, are state business taxes as a % of income a better measurement than a tax rate ranking? Please comment below.

Keeping mileage logs is an aggravating requirement in order to claim vehicle expenses for most small business owners. There are some exceptions to a log – hearses, ambulances and 18 wheel trucks come to mind – but most people have to keep a written contemporaneous record or there is no vehicle deduction. Written contemporaneous record is IRS code for a mileage log. You can read more about the requirements in this post.

This post is about a way to make keeping a log a bit less taxing (sorry, pun intended).

Smartphone Apps substitute for mileage logs

Here is one that is popular with accountants – MileIQ. It works on Android smartphones and iPhones. Sorry, BlackBerry and Windows users you need to look elsewhere. Since I have a Windows Phone, I do not have personal experience with this app so please try before you buy. The application eases mileage tracking by:

Logs every trip automatically

Calculating the mileage automatically

Syncs with the cloud so you have a backup in case you lose your phone. IRS does not forgive you for losing your paper log.

Swipe to tell the app whether the trip is business or personal

Saves location names for those frequent destinations

Space to enter the extra information IRS wants – e.g. purpose of trip

It adds up total business miles so no manually totaling hundreds of entries

Currently, the monthly fee is $5.99 or annually you pay $59.99. If you have 40 or fewer a month, MileIQ is free.

Special rules for Meals and Entertainment

Congress decided there was a higher chance for fraud or errors in deducting meals and entertainment. Consequently, Congress enacted Section 274 of the Internal Revenue Code in 1962 creating special meal and entertainment tax rules. There have been quite a few changes to Section 274 but this post will only cover the current rules. Beyond the normal documentation to claim any business deduction Congress added these additional documentation requirements:

The amount of each separate expense

The date of the event

The name, address or location, and designation of the type of activity. For example, dinner or theater, if that information is not apparent from the other information.

The business reason for the expense or the nature of the expected business benefit. Include the nature of any business discussion or activity before during and immediately after.

The occupation or other information relating to the person(s) attending. Include their name(s), title(s), or other designations, sufficient to establish business relationship to the taxpayer.

Leave something out, IRS will deny the deduction and the courts will uphold the IRS. Congress allowed no leeway for IRS or the courts. A perfect example where Congress needs to allow IRS and the courts some discretion. If you agree, please contact your Representative and Senator.

Per Diem rules

Per Diem expenses must be documented the same as all other meal expenses. If the Per Diem exceeds the federal amount then the employee has to return the excess, or the entire amount, not just the excess, must be included in the employee’s wages.

Conclusion

To sum this post up, want a deduction for meals and entertainment then keep the proper documentation. This is a brief summary of the rules so please contact us for more details or post a question or other comment in reply to this post.